Tax fraud involving prisoners remains a major problem
More than 24,000 fraudulent tax returns were filed in 2015 using a prisoner’s Social Security Number, claiming refunds totaling over $1.3 billion, according to a new report.
The report, from the Treasury Inspector General for Tax Administration, found the IRS did not screen and verify many prisoner tax returns for signs of fraud. TIGTA identified 4,072 prisoner tax returns that reported income and withholding that were not supported by third-party income documents. Those filers received potentially fraudulent refunds totaling over $7.3 million.
Tax refund fraud associated with prisoner Social Security Numbers has been a big problem for the IRS and correction authorities. Under current law, the Federal Bureau of Prisons and State Departments of Corrections are supposed to provide the IRS with an electronic list of all incarcerated prisoners so the IRS can stop fraudulent refunds from being issued. The law also lets the IRS get Prisoner Update Processing System data from the Social Security Administration and provide information to the head of the Federal Bureau of Prisons and State Departments of Corrections about inmates whom the IRS thinks either may have been issued an improper payment or somehow facilitated the payment.
TIGTA found, however, that the IRS’s processes still don’t ensure the Federal Bureau of Prisons and the State Departments of Corrections comply with prisoner reporting requirements. TIGTA identified 861 prisons that reported prisoner information to the SSA, but didn’t report the same information to the IRS. The report also identified 272,931 inmates who resided in Federal Bureau of Prisons or State Departments of Corrections, but weren’t reported to the IRS. Approximately $48 million in potentially fraudulent refunds were claimed by 16,742 individuals incarcerated in institutions that didn’t report prisoner information to the IRS.
On top of that, the processes employed by the IRS to validate and use prisoner data limit its ability to detect potentially fraudulent tax returns. For example, the IRS doesn’t use the data provided by federal and state prisons to identify potentially fraudulent prisoner tax returns where the information provided for inmates doesn’t match IRS data.
TIGTA identified 1,075 tax returns filed using mismatched prisoner information in which the reported income wasn’t supported by third-party income documents. They received refunds totaling more than $3.1 million. In addition, the IRS validation process incorrectly identified prisoner records as having a mismatch when the information actually matched the IRS’s records. TIGTA identified 1,113 returns with refunds totaling more than $1.7 million that the IRS didn’t identify as prisoner tax returns, thanks to this error.
“Even though the IRS has made some improvements in its ability to prevent prisoner refund fraud, eliminating this problem continues to be a significant challenge for the IRS,” said TIGTA Inspector General J. Russell George in a statement. “IRS procedures must ensure that Federal and State correctional institutions are reporting prisoners from all of the facilities within their jurisdiction.”
In its report, TIGTA made eight recommendations to the IRS, and the IRS agreed with five of them. TIGTA recommended developing a master list of prison institutions nationwide for use in verifying prison institutions’ compliance with reporting requirements and evaluating the inclusion of valid SSNs associated with records in the Prisoner Mismatch File for use in identifying prisoner tax returns.
TIGTA also suggested the IRS coordinate with the Treasury Department’s Office of Tax Policy to consider a legislative proposal to allow the IRS to provide mismatch records to the prisons to resolve. Finally, TIGTA said the IRS should include identity theft tax returns it identifies as filed using a prisoner SSN in its annual report to Congress and clearly define a prisoner for the purposes of fraud criteria as well as for the annual report. However, the IRS didn’t agree to pursue a legislative proposal to share mismatch records with prisons, include criminal investigation results in its annual report to Congress, and evaluate the effect of limiting verification to full-year prisoners.
“We have communicated with representatives from every state and federal correctional agency to educate them on the problem of prisoners committing tax fraud and to discuss strategies for its prevention,” wrote Kenneth C. Corbin, commissioner of the IRS’s Wage and Investment Division, in response to the report. “Further, we have implemented many improvements to our prisoner tax compliance strategies that have achieved the following results: Fraudulent returns submitted by prisoners have fallen from a high of 186,482 returns in 2001 to 24,258 in 2015, an 87 percent reduction from its peak in 2011. We stopped over 99.9 percent of the $1.325 billion in fraudulent refunds claimed by prisoners in 2015.”
In fiscal year 2016, he added, 1,187 prisons participated in the IRS’s “Blue Bag Program,” and from them the IRS received 984 pieces of correspondence containing tax-related documents and refund checks for evaluation as evidence of potential fraud.